The Hagstrom Report

Agriculture News As It Happens

RMA reducing corn, soybean crop insurance rates

Re-Rating Map Corn
Rerating Map Soybeans
In a move that could affect the 2012 farm bill debate and presidential election as well as save farmers and the government money, the Agriculture Department’s Risk Management Agency announced today that it will update the methodology to set crop insurance premiums, leading to lower insurance premium rates for many corn and soybean producers in the 2012 crop year.

William Murphy
Risk Management Agency
Administrator Bill Murphy

“On average, these new rates should reduce corn farmers’ rates by 7 percent and soybean farmers’ by 9 percent,” RMA Administrator Bill Murphy said in a news release and telephone news conference.

In Iowa, Indiana and Minnesota, the rate reductions for insurance on corn may be as high as 12 to 13 percent, Murphy said, although he noted that the rate reductions will vary by county within those states.

Corn and soybean farmers whose production in concentrated in Corn Belt states such as Iowa, Illinois and Indiana, where severe weather-related losses are relatively rare compared to the Plains states, have complained for years that their rates have been too high. Those complaints have intensified as crop prices have risen and the cost of insuring a more valuable crop has also gone up.

Murphy said in the news conference that it is difficult to estimate the exact savings to either farmers or the government since farmers in the past have increased their levels of coverage when rates have gone down. Corn and soybeans make up about 65 percent of crop insurance business, Murphy said. The rate of return for the crop insurance industry should stay at 14 to 14.5 percent even though the cost of individual premiums will go down, he added.

The government paid $1.75 billion in fiscal year 2010 and $2.89 billion in fiscal year 2011 to subsidize crop insurance premiums on corn, and paid $1.07 billion in fiscal year 2011 and $1.59 billion in fiscal year 2011 to subsidize soybean premiums.

Since farmers and USDA share the cost of crop insurance premiums, both farmers and the government will save money with the rate adjustment.

“As good stewards of taxpayers’ dollars, we welcome the opportunity to match premium rates more accurately with current risks,” Murphy said.

The creation of the average crop revenue election program called ACRE in the 2008 farm bill and the inclusion of another variation in the farm bill proposal that congressional leaders prepared for the failed super committee reflected those concerns about cost insurance costs.

Other commodity groups have said proposals aimed to help corn growers were too focused on production regions where the likelihood of weather losses is low. As the farm bill debate continues, the lower crop insurance rates could affect what issues corn and soybean farmers consider the most important in the farm program going forward.

The lower crop insurance rates taking effect in a presidential election year could also help President Barack Obama in his re-election campaign, since they will be felt by big farmers who are less likely to vote Democratic. In the news release, USDA said noted that net farm income is at unprecedented levels while the debt load has fallen by half since the 1980s.

“The Obama administration, with Agriculture Secretary [Tom] Vilsack’s leadership, has worked tirelessly to strengthen rural America, implement the farm bill, maintain a strong farm safety net, and create opportunities for America’s farmers and ranchers,” the news release said.

Murphy said the rate adjustment is based on findings of an independent study and peer review process that is part of a continuing review for actuarial soundness.

“We are improving the formulation of our rate-making methodology, and are moving to establish the most fair and appropriate premium rates for today’s producers,” Murphy said.

RMA said it contracted for a study by Sumaria Systems Inc., which examined premium rates and the rating process, starting with the major commodities of corn and soybeans. RMA then requested an independent expert peer review to provide feedback on the Sumaria study results.

RMA will conduct further review and analysis of the study’s recommendations along with comments and issues raised by peer reviewers, making additional adjustments as warranted and appropriate, the agency said.

Murphy said the current approach “will make a concerted effort to adjust premium rates in a manner that recognizes the latest technology, weather, and program performance information.” Updated data pertaining to prevented planting, replant payment, and quality adjustment loss experience, was also used in determining rates changes, he added.

For both corn and soybeans, RMA will now use a rolling 20-year average of crop performance to determine premiums rather using all years since 1975, Murphy said. The new system will eliminate the significant loss years of 1983 and 1988, but the catastrophic portion of the premium will still go back to 1975. The corn rate will assume that growers are using biotech seed, which also reduces risk. All corn farmers will get the advantage of the assumption of the use of biotech seed even if they do not use it because the use is now so widespread, Murphy said.

RMA said it will release actuarial documents by Wednesday reflecting premium rates and other program information that will be effective for the 2012 spring crop season.

Murphy said RMA will move forward with the re-evaluation of rates for other crops and will determine whether new rates should set for wheat, cotton, grain sorghum and potatoes in 2013. He said it is unclear whether the study will be done in time to reset rates for winter wheat that will be planted in the fall of 2012.